It’s not easy piecing together an overarching narrative to understand global markets. But it is necessary. And that’s because humans think in stories. Our narrative-based cognitive abilities allow us to take extremely complex scenarios, in which we never have complete information, and create flowing stories that are easily understandable. This process that we use to cut through complexity is one of our greatest strengths. But it also comes with a number of weaknesses. When creating these stories we tend to inject our own biases that quickly warp things from objective to subjective. This creates blind spots in our analysis that are very difficult to protect for.But that’s why we don’t stop at just creating a narrative. Once we’ve completed that task, we take a step back and strip out our human biases by analyzing what we’ve created with pure data — ones and zeroes.
The Quant Overview attacks our narrative from a data angle to help find what we’re missing.
Sure our narrative analysis may tell us that US equity markets should rise over the next 6 months. But what do our purely quantitative S&P studies say? Considering factors such as the number of days equities have risen in a row without a pullback, seasonality, correlation studies with other markets, etc, does that quantitative aspect match up with our qualitative assessment? If not, why?
We absolutely do use a significant amount of data to create our original narrative. But the process of then reverse engineering that narrative from a pure quant perspective helps solidify the narrative even further. Its roots out the biases and blind spots, while often providing insights into trades we may have missed otherwise.
One of our main focuses in the Quant Overview is the VIX volatility index. The VIX is useful because it helps take our entire global assessment and distill it into a single “fear” index. If investors are complacent in regard to global risks, the VIX will be low. If investors are worried, it will be high.Through the VIX we can directly combine our global analysis with investor sentiment. The question is never just what we believe, but what other investors in the market believe as well. That’s how we play the game at the second and third levels. We then use various tools like the VIX Futures Curve and Volatility Term Structure to find opportunities where we bet on either higher or lower volatility. This diversifies our total investment strategy and opens up an entire new way to profit on global markets. You’ll see it all done in the Quant Overview.
At the end of each MIR you’ll find two things, our Asset Allocation Weightings and our Portfolio Snapshots.
Our Asset Allocation Weightings provide our outlook on various markets and asset classes. We evaluate everything from gold to biotechs with either underweight, neutral, or overweight. This section will give you a succinct summary of the conclusions of our macro analysis.We’re currently working with a number of Financial Advisors in the Operator community to keep building this allocation table out. The goal is to create an entire allocation strategy for our FA’s and other longer-term investors to use that’ll eventually be included in the MIR as well.